The Financial Services Authority, the City watchdog, has launched a fundamental shake-up of the financial services industry with a proposal to scrap the regime for giving consumers independent financial advice.

In a highly controversial move, regulators want to ditch the old system designed to prevent consumers being misled when they are sold pensions and investments.

The proposal provoked immediate criticism from the Consumers' Association and the Association of Independent Financial Advisers, who attacked the reform as anti-consumer.

Independent advice

Since 1988, independent financial advisers have been defined by the fact that they can give advice on investments produced by any firm on the market.

They are normally "independent" in the sense that they are not owned by the company that produces the ISAs or pensions they recommend to their customers.

In theory that allows them to pick the best investment for their clients from the thousands available on the market.

The other types of financial adviser include company representatives - sales reps employed by companies such as the Royal London or Liverpool Victoria; and tied agents, which agree to sell one company's products on their own.

As tied agents sell only one company's products they cannot call their advice independent.

But the regime has been attacked for giving consumers false assurances about the quality of advice they get when they buy a policy.

Commission-hungry?

In theory independent financial advisers (IFAs) pick the best product for their customer from the thousands available.

In practice most large firms have a short "panel" consisting of less than ten products they recommend in each category - pensions, ISAs, bonds etc.

In theory the firms pick those companies with the best charges, the best record of growing their clients' investments, and the best service.

In practice there is a strong incentive for the IFA to recommend the product that pays the highest commission, which ultimately comes from the customer.

The Financial Services Authority has conducted research which suggests consumers lose �140m a year because of this "commission bias".

It says advice would be more independent if advisers got the same reward no matter which product they recommended.

Howard Davies, the FSA's chairman, said: "The extensive research we have carried out as part of this review demonstrates that the regime we inherited now represents a major market distortion and has simply not delivered sufficient consumer benefits to justify maintaining it. So we propose that it should be abolished".

Greater choice

Under the proposals, companies such as Liverpool Victoria or Royal London would be allowed to offer and give advice on other company's financial products.

The FSA says this will give consumers greater choice. While independent advisers now sell more than half the country's long-term savings products, they concentrate on the wealthy. Those on more modest means are rarely offered the choice of as many different company's products.

The proposed reform has angered the Consumers' Association, which says the changes will blur the distinction between independent advice and pure sales - a distinction consumers were just beginning to understand.

"These proposals could in fact further confuse consumers and make the distribution of financial products even more complicated," said Sheila McKechnie, the Consumers' Association's director.

It believes the FSA's changes will do more to boost the big industry players than to help consumers.

"Instead of boosting independent advice, these reforms are more likely to squeeze IFAs out of the market."